Private providers of online education to public schools have enjoyed healthy gross margins, in no small part because buyers haven't really known what to pay for services in this emerging sector.

They are learning. In Pennsylvania, Education Secretary Gerald L. Zahorchak has noticed the profitability of the sector and decided it's time for a change. In this case, the subject is per pupil payments for cyber charters, but the principle holds equally for online services provided to traditional public school districts or state education agencies.

From his testimony to the Pennsylvania House Education Committee:

Despite dramatically different cost structures, cyber charter schools are funded in the same way as “brick and mortar” charter schools.  The school district of residence for each cyber charter student is required to pay the cyber charter a per-student rate based on the school district of residence’s own costs....

As submitted in the 2005-06 Annual Financial Report, Pennsylvania’s 12 cyber charters expended only $106 million, while collecting $117 million – a difference of more than $800 per student.  Fully one-fifth of Pennsylvania school districts have to spend less per student than the cyber charter schools collect in per pupil revenue.... At the end of 2005-06, cyber charter schools also had a cumulative unreserved fund balance of $28 million – or 26% of their annual expenditures.  For comparison purposes, Act 48 of 2003 prohibits school districts of a comparable size from raising taxes if their unreserved fund balance is more than 12% of their annual expenditure level....

We propose establishing a single statewide cyber charter tuition rate based on the most efficient and effective cyber charter school’s actual expenditures that would allow taxpayer dollars to be used more responsibly and equitably.  Local taxpayers would save tens of millions of dollars without impacting the quality of education delivered by Pennsylvania’s cyber charter schools.  Furthermore, it ensures that cyber charter schools will be held accountable for their spending in a similar manner to public schools.

If you are thinking abgout investing in cyber-EMO K12's IPO, think again. Once one state lowers the per pupil fee for online education services, the rest will follow. This was risk number one in the firm's prospectus. Until and unless a provider can demonstrate dramtically superior results, and K12 can't - again note the prospectus - the price of online education services will move in the direction of a commodity. Do you believe K12 can be the lowest-cost provider?